Investing.com -- Fitch Ratings has lowered Gray Media, Inc.'s Long-Term Issuer Default Rating (IDR) to 'B-' from 'BB-', citing high leverage and reduced prospects for deleveraging in 2025, a non-political year. Gray's senior secured debt rating was also downgraded to 'B+' from 'BB+', and its senior unsecured issue ratings were lowered to ' CCC (WA: CCCP )'/'RR6' from 'BB-'/'RR4'.
The downgrade reflects the company's high leverage, which has been driven by margin erosion over the last four years. This has significantly reduced its capacity for deleveraging through Free Cash Flow (FCF) generation, especially given the lack of major global media events until 2026. Fitch also took into account Gray's recent efforts to reduce debt and implement cost-saving initiatives to stabilize margins, while maintaining a satisfactory liquidity position. The Negative Outlook is due to the expected high leverage until 2026 and the limited time frame for refinancing upcoming maturities starting in 2027.
Since acquiring Raycom Media, Inc. in 2019, and later Quincy Media, Inc. and Meredith (NYSE: MDP ) Corporation's local media assets in 2021, Gray has accumulated significant acquisition-related debt. This has put pressure on the company's capital structure, with L8QA EBITDA leverage reaching around 7.0x at the closing of the Meredith acquisition. The company's focus has been to rapidly deleverage through FCF generation.
However, expected margin gains and strengthened political-cycle monetization did not materialize as anticipated due to a prolonged advertising recession in the national market, compounded by post-pandemic macroeconomic impacts that underscored sector challenges. Since 2021, Gray has struggled to maintain margin gains, which negatively affected FCF. This has led to a slower-than-expected reduction in leverage. Fitch predicts Gray's leverage will remain above 6.5x until 2026, with a slight decrease expected due to margin gains from implemented cost-cutting initiatives.
Over the last four years, Gray's margins have declined from the mid-30%'s to the high-20%'s. This reflects a weakened linear advertising market caused by decreased national demand, rising operating costs, and lower political advertising revenue. To stabilize margins, Gray has implemented $60 million in cost-saving initiatives and secured more profitable renewals of retransmission contracts. It has also worked on developing its digital advertising infrastructure and increasing retrans exposure to MVPDs and other digital mediums.
Fitch expects Gray to actively manage its capital structure, aiming to reduce leverage over the next two years through debt repayments from FCF generation or non-core asset divestitures. This is especially important as $1.9 billion in debt is set to mature in 2027 and 2028. Fitch believes Gray has enough time to generate cash to pay off its 2027 notes, which would pave the way for the refinancing of 2028 and 2029 debt maturities. In Fitch's rating case scenario, Gray is projected to generate approximately $210 million-$250 million on average in annual FCF over the next four years.
Despite concerns about the retransmission business peaking due to rising cable network costs and subscriber base erosion, Gray benefits from its strong position as the largest owner of top TV stations. It provides premium local content while expanding exposure to MVPDs and digital platforms to counter cable network challenges. Additionally, Gray is enhancing its digital advertising solutions, leveraging local media infrastructure to mitigate national advertising underperformance.
Since late 2022, national advertising spending has significantly decelerated, revealing weaker-than-expected conditions for linear advertising segments amidst growing competition from digital advertising solutions. This slowdown was further exacerbated by a post-pandemic high-interest rate environment that notably constrained national advertising budgets. Although there has been gradual recovery, the market continues to lose share to the digital advertising sector.
On a consolidated basis, Gray covers 37% of U.S. television households. Its strong portfolio of assets includes #1 ranked stations in 78 of its 113 markets (approximately 69%) and #2 ranked stations in another 21 (about 19%) during 2024. Station ranking is important to advertisers, especially for political advertising, with the #1 or #2 ranked stations garnering a large portion of political revenues directed at local television broadcasters.
The diversified media industry has faced significant macroeconomic and operating challenges over the past four years. This culminated in a linear advertising recession from 2H22 into 2023. Excluding political advertising demand, both the local and national advertising markets had inconsistent performance in 2024, with a sluggish national market coupled with a resilient but weaker local performance, accentuating a potential trend as the company enters an off-political cycle year.
The new federal government administration is looking to revisit existing regulations in the sector regarding limitations on industry consolidation and commercial rights to direct negotiation with virtual MVPDs among others that might positively impact the sector business model.
Gray's 'B-' IDR reflects its smaller scale and higher leverage relative to larger and more diversified media peers like Paramount Global (BBB-/Negative) and Warner Bros. Discovery (NASDAQ: WBD ), Inc. (BBB-/Stable). Gray's ratings reflect the company's high leverage, which is offset by its enhanced scale and competitive position. Gray is the second largest U.S. station group by revenue and U.S. TV household reach. It also maintains the highest broadcast revenue per television household owing to its strong portfolio of highly ranked television stations.
Fitch assumes a fully drawn revolver ($680 million) and 75% availability used under the $300 million A/R facility in its recovery analysis as credit revolvers are usually drawn during periods of financial distress. Gray had $3.8 billion in senior secured term loans and notes, $2.5 billion in unsecured debt, and $650 million of preferred equity.
Factors that could lead to a downgrade include failed refinancing execution leading to a more complex refinancing of upcoming debt maturities, weaker than expected monetization strategy evidencing a further margin erosion and decreased FCF generation, L8QA EBITDA leverage sustained above 6.5x over the next political cycle, and a deteriorating liquidity position.
Factors that could lead to an upgrade include proactively addressing upcoming maturities with an effective refinancing strategy, demonstrated execution of operational improvements resulting in EBITDA margin expansion, leading to a stronger FCF and improved liquidity position driving, L8QA EBITDA leverage below 6.0x, and maintaining a moderate financial policy coupled with an adequate liquidity position.
As of Sept. 30, 2024, Gray's liquidity position amounted to approximately $743 million, comprised of $69 million in cash and $674 million in borrowing capacity under its $680 million revolver, due in December 2027. Over the past four years, Gray has averaged about $250 million in FCF after dividends, and capital expenditures associated with the Assembly Atlanta development. Despite spending around $600 million on the studio during 2021-2023, Gray was still able to reduced its debt by about $620 million in 2022-2023. Fitch expects Gray to generate around $270 million-$330 million in FCF during political years and about $150 million during non-political years.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.